Six Things Kids Should Know About Money

Financial lessons for all ages, especially the young

What do kids need to know about money, and when should they know it? Every family faces this riddle, hoping to instill responsible financial habits at an early age without burdening children with money worries too soon. Here are six basic concepts that will benefit kids of different ages as they begin to make their own financial decisions.

1) Saving gives us a better future.

Children can learn to save at an early age. You can promote the idea of saving for the future by helping your kids think of a special purchase they’d like to make, such as a game, sports equipment, or electronics. It’s important for them to see progress toward their savings goal, whether it be via the heft of their piggy bank or by viewing an online savings account balance.

And while the concept of retirement doesn’t resonate with youngsters, the idea of saving for things far in the future can. One approach is to open a Roth IRA for your kids, even if you make contributions for them in early years. There’s no minimum age to open an account, but the child must have earnings to make contributions. Because the money in a Roth is off-limits until retirement age, it helps to reinforce long-term thinking and financial discipline.

2) Sharing and giving is fun.

Saving for one’s own needs builds discipline, but using some money for gifts – Mother’s Day, charities, holidays, etc. – builds character. Children often have an instinct for sharing and will enjoy using a portion of their savings to help others. As you help your kids set savings goals, be sure to include a portion earmarked for giving.

3) Money is money, no matter its form.

Never have there been more ways to make purchases than we have today. Kids need to understand how a checking account works by the time they leave for college, but they also need to know that paying with PayPal, BillMeLater, prepaid cards, key fobs, online banking, their cell phone, iTunes account, debit and credit cards and whatever comes next is just like spending cash. It’s all money, even if it is digital, invisible, and instantaneous. And some of it is worse than money – when interest and fees apply. (A $10 prepaid card may only yield only $9 in value, for instance.) Non-cash payments may be convenient, but can quickly lead to spending problems, especially for kids with limited incomes and hearty consumer appetites.

4) Budgeting identifies priorities.

Living by a monthly budget is no more fun than dieting, but it’s important for financial health. Not only does it cut down on frivolous spending, it helps students and young workers evaluate their personal and financial priorities. When there’s not enough money in the budget for the cell bill, new clothes, concert tickets, a weekend trip with friends and car repairs, which line items will make the cut? Knowing where one’s money goes is a habit that benefits people of all ages. Learning it early is a big plus.

5) What goes up can go down.

When young workers start earning money and investing in stocks or mutual funds, it may feel like a fun video game, especially if everything goes up for a while. We all learned (or relearned) over the last few years that even long-time winning stocks can tumble without warning. There are no guarantees in investing, and recognizing the risk that markets or individual securities may go down is just as important as understanding that over long periods equity markets have historically moved upward.

6) Expect financial surprises.

Just as financial markets go up and down, so too can careers. As many families learned in the recent recession, even highly qualified and experienced professionals can find themselves out of work or under-employed for extended periods. Young workers with shorter resumes are especially vulnerable. The 2011 Schwab Teens & Money Survey found that the average 16-18 year-old expected to start at a salary of $75,000 – far beyond the national average household income. As expectations and reality are often disconnected, new graduates should work to build up an emergency fund of at least six months of living expenses…or be prepared to move back in with Mom and Dad.

These six items are just a few of the many important lessons that will help children make smart financial decisions. Some children will absorb these ideas quickly; others will need to learn some lessons through experience. In either case, the learning process starts with communication at home, and learning through the example set by parents. Many experts advocate that even in wealthy families children should have a part-time job while still in high school to appreciate the value of a dollar.

Many books and online resources are available to help your children learn about money. One good source is www.360financialliteracy.org.

© 2011 Bright Sky Group, LLC. All rights reserved.

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